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Fed Baseline is Three Rate Hikes for 2018

Saturday, 07 Apr, 2018

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Newly appointed chairman of the Fed, Jerome Powell, announced the news in his first meeting with other central bankers.

The US Federal Reserve did what was widely expected of it - it raised the fed funds rate target by 25 basis points to 1.5%-1.75% following its 20-21 March FOMC meeting.

February 2018 brought a national unemployment rate of 4.1 percent, a 17-year floor, making the streak continue for its fifth consecutive month. That was an increase of a quarter of a percentage point. Inflation has been soft since the end of the Great Recession in mid-2009 and it's still quite low by historical standards.

Fed Board members and Fed Reserve Bank presidents' median projection for real GDP growth was revised higher to 2.7% this year (from 2.5% predicted in December 2017) and 2.4% next year (from 2.1%) and unchanged at 2.0% in 2020.

Stocks rallied after the announcement.

The Fed's policy committee still assembled notwithstanding the snow that closed most of Washington and the resolution to hike rates was undivided.

The ripple effect of the Fed rate hike may be felt in India, too. Financial conditions have tightened since late January as investors look for signs that the central bank might raise rates at a faster pace, while forecasters predict stronger USA growth and tight labor markets.

The US unemployment rate by the end of 2018 is expected to edge down to 3.8 per cent, indicating the Fed sees more room for the labour market to run.

Earlier this month, Powell told lawmakers the economy was "strong" and tax cuts would add "meaningfully to growth".

Of the 15 officials offering forecasts on interest rate increases over the balance of 2018, seven expect three or more additional rate hikes while eight are calling for two or fewer.

The unanimous decision on Wednesday's rate hike signals to Wall Street that Powell, for the time being, will stick with his precedessor Janet Yellen's plans for gradual rate increases.

A healthy job market and a steady if unspectacular economy have given the Fed the confidence to think the economy can withstand further increases within a still historically low range of borrowing rates. Since the last meeting in December, Congress passed a $3.5 billion tax cut and a two-year, $300 billion funding increase.

The Federal Reserve is raising its key interest rate and signaling confidence in the US economy's durability but plans to continue a gradual approach to rate hikes for 2018 under its new chairman, Jerome Powell.

Adam Cole, chief currencies strategist at RBC Capital Markets, said a "knee-jerk reaction" to the Fed flagging four hikes this year may see the dollar strengthen against the euro.

"The Fed is willing to wager that rates will need to be structurally higher than previously thought, in that its "long-run dot" moved slightly higher for essentially the first time after years of moving down".